Inflation longer, more intense than expected, says Bank of Portugal

The governor of the Bank of Portugal (BoP), Mário Centeno, said on Wednesday that inflation has been “longer and more intense than a supply shock would predict.

“This duration tends, over time, to be transmitted to the economy and the financial system. Hence the importance we give, in our economies, to price stability” and consequently financial stability, Centeno said at the opening of the presentation of the Financial Stability Report in Lisbon.

According to the governor of Portugal’s central bank, in a scenario of high instability of external factors, financial stability in the future will depend significantly on the collective success in reducing inflation.

“Inflation sometimes silently intrudes into the financial cushions, into the savings of families and companies. It is installed as a symptom of something that is not right in our economic system and can only be fought if it is done in a joint and coordinated way, and that is the message we want to send out, and that is the great goal of monetary policy for the coming times,” the former finance minister assured.

The most recent data from Statistics Portugal (INE) on inflation for October showed a year-on-year variation in the Consumer Price Index (CPI) of 10.1%, the highest since May 1992.

The Harmonised Index of Consumer Prices (HICP) registered a year-on-year change of 10.6% in October, up 0.8 percentage points on the previous month and 0.1 percentage points below the value estimated by Eurostat for the euro area (in September, the rate in Portugal was also 0.1 percentage points below the euro area rate).

The BoP noted in the Financial Stability Report published today that the war in Ukraine and economic developments in China have had consequences on monetary policies and established “high uncertainty of economic projections”, putting financial stability at risk.

“The invasion of Ukraine and economic developments in China, impacting economic activity and inflation, generate uncertainty with consequences for the conduct of monetary policies around the world,” it said.

According to the report, this intensification of geopolitical tensions “has materialised in a strengthening of inflationary pressures, particularly through rising energy and food costs that spill over to the prices of other goods and services.

Added to this factor is the acceleration of the financing costs of various institutional sectors, the consequent conditioning of their capacity to service debt and the low confidence of economic agents.

“These factors, when combined, attest to the substantial volatility observed in international financial markets, where any sign of economic slowdown or acceleration is absorbed and reflected in the main equity indices, as well as in the yields of sovereign debt securities,” the report published on the Bank of Portugal website reads.